Betfair as a Commodity Market


Traditionally, betting consists of backing a runner at certain odds, and hoping that the runner wins.  On Betfair, however, you can play the role of either the punter or the bookie or both.  This allows you to play the market in a way analogous to buying and selling commodities.  You may not understand terms like laying off or digital odds, but everyone understands the buying and selling of widgets in the hope of making a profit.

This brief guide assumes that you understand the mechanics of using Betfair.  Consult Betfair's documentation to learn how to use Betfair.

Each runner in a Betfair event is in effect a commodity.  If you can buy units of this commodity at a low price and later sell them at a higher price (or vice versa), you can make money - and with care you can make a profit (or, at worst, a loss) which is independent of the outcome of the event!  Instead of backing (or laying) a runner in the hope that the runner will win (or lose), you buy and sell units of a runner depending on whether you think the price of that runner will rise or fall before the event is actually run.

Betfair displays and uses digital odds, which I shall refer to as the rate or r.  A rate of r is equivalent to traditional odds of r-1:1.

In the commodity view of a runner, that runner's unit price u (in £s) is simply 1/r.  That's it.  u=1/r.  That's the only hard part of this explanation.  The rest is common sense.

When you back a runner, think of it as buying a certain number of units of that runner (which doesn't have to be a whole number); when you lay a runner think of it as selling a number of units.  Your aim is to end up owning no units of each runner.  After an event is actually run (settled), you will in effect be forced to buy and/or sell units so that you have no units left, at the settled price of those units.  The settled price a unit of the winner is £1; the settled price of a unit of a loser is £0.  But if you can ensure you have no units before the event is settled, you won't have to buy or sell any units when the event is settled: you'll have had control of the prices at which you've bought and sold, and any profit (or loss) you've so far recorded will be locked in (less Betfair's commission, of course).

Finally, short selling of units of a runner is allowed.  This means selling units when you own none in the first place.  The market doesn't care whether you own a positive number of units of a runner at any particular time (ie you're a net backer) or a negative number (ie a net layer).  The only restriction is that you must end up with no units, either by balancing your books before an event is settled, or by forced buying and selling after an event is settled.  This means, for example, that if you still own a negative number of units of a runner when an event is settled, you will be forced to buy that number of units at the settled price so that you end up with no units, and in particular, if that runner won, you will have to pay £1 per unit for the privilege.  Be warned!

Let's look at a simple example.  Suppose a certain runner Mister X's current digital odds are 5.  That means a unit of Mister X currently costs £1/5=20p.  Suppose you choose to put £20 on Mister X to win.  In effect, you are buying 100 units of Mister X at 20p per unit.  We'll write this down in a ledger (or book):
 

Mister X Ledger
Digital Odds
(r)
Unit Price 
(u = 1/r)
Stake
(s)
Units bought
(n = s/u)
Current Balance
(£)
Current Inventory
(units)
5 £0.20 £20 100 -£20 +100
 
 

Your current balance is -£20 because you have spent £20.  Your current inventory is +100 units because you have bought 100 units.  The last two columns are maintained as running totals.

Some time later, let's suppose Mister X's digital odds have gone down to 4.  When the odds go down the price of a unit goes up (and vice versa).  In this case, the price of a unit of Mister X has gone up to £1/4=25p.  Let's suppose you want to balance (or square) your Mister X ledger.  This means you want to sell all of your units of Mister X.  Start by filling in what you know and where you want to be on a new line in your ledger:
 

Mister X Ledger
Digital Odds
(r)
Unit Price 
(u = 1/r)
Stake
(s)
Units bought
(n = s/u)
Current Balance
(£)
Current Inventory
(units)
5 £0.20 £20 100 -£20 +100
4 £0.25 -100 0
 

The number of units bought is negative because you are selling units (laying Mister X).  Finish by calculating the required stake s = nu and write in the new balance:
 

Mister X Ledger
Digital Odds
(r)
Unit Price 
(u = 1/r)
Stake
(s)
Units bought
(n = s/u)
Current Balance
(£)
Current Inventory
(units)
5 £0.20 £20 100 -£20 +100
4 £0.25 -£25 -100 +£5 0
 

Again, the stake is negative because you are selling (laying).  This means you have to lay £25 on Mister X at the current rate of 4.  When you have done so, your book will look like the above.

The current balance is the amount you've received less the amount you've spent.  It is your profit/loss (P&L).  Here you have made a profit of £5.  Because your current inventory is now zero, this profit is locked in: it doesn't matter whether Mister X wins or loses the event either way, you make a profit of £5!